Student Loans: The Extra Premium Paid for Being Poor

Like most of the revelations and allegations that have poured out of Andrew M. Cuomo’s office in the New York attorney general’s investigation into the student loan industry, his latest is provocative and highly charged. Two weeks ago, in a powerfully worded letter to Sen. Christopher Dodd (D-Conn.) and Rep. George Miller (D-Calif.), Cuomo accused some providers of private student loans with engaging in the kind of racial discrimination that home mortgage lenders once practiced.

Some private lenders, he contended, have been using judgments based on the college a student attends — in addition to typical criteria such as the credit ratings of borrowers and their parents — as one factor in the evaluation that ultimately affects the interest rate on a loan. The practice, he wrote, is “analogous to ‘redlining’ in the home mortgage industry,” a reference to charging higher rates based on a prospective homeowner’s neighborhood, common a generation ago before federal laws changed to prohibit it.

Taking a specific college, or type of college, into account as a factor in determining a credit score could theoretically mean that loans to students at, say, Harvard could be seen by lenders as less risky and therefore more desirable than those made to students at community colleges, for-profit institutions and historically black colleges. John Dean, special counsel to the Consumer Bankers Association, said, for example, that “some underwriting criteria include future earnings prospects that may be reflected in the type of institution.” That’s where the allegations of discrimination have come in, because critics of the practice say there is a disparate impact that places disproportionately poor and minority students at a disadvantage when applying for loans. . . .